Maine oil prices: a mystery, gamble

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Customers who want to lock in their heating oil rate for next winter could be paying at least 60-cents more per gallon than they did a year ago, and the question they need to answer before signing on the dotted line is: Am I feeling lucky today?

The commodities market, where oil supplies are purchased and traded, and prices set, has become erratic, leaving some to wonder whether more than supply and demand are in play. Oil prices have gone from $58 a barrel to $50 and back to $55 all in one month.

Several states, including Maine through the Maine Oil Dealers Association, have asked the General Accounting Office to investigate whether over-speculation in the market is driving up the price of oil.

Meanwhile dealers and customers are trying to figure out the right price to pay for their supply. The rate can change depending on the day you call.

The state’s bigger oil dealers – like CN Brown and Webber – are just now offering rates for next winter to customers who want to pre-buy or lock in their oil price. Dead River will be coming out with rates in about a week. The oil dealers then make a purchase on the commodities market to cover their customers’ requests.

Mark Cyr, retail sales manager for CN Brown, said the rate as of last week for those willing to pay for their oil up-front was $1.95 to $2.09 per gallon as compared to $1.39 to $1.45 last year.

The offer tracks the average price of oil statewide, which at the end of last month was $2.12 – 61 cents higher than the same time last year, according to the State Planning Office.

And, while the offer may sound high, so did last year’s pre-buy rate in April, but it proved to be an excellent gamble as oil shot up to more than $2 a gallon.

Some dealers also offer capped rates for their good customers with good credit, who want to pay monthly. The ceiling has been 10 cents or so higher than the pre-buy price, but if rates drop during the season, the customer pays less. And, if the price goes over the ceiling, they get a great deal.

“We had a lot of happy customers,” over the winter, Cyr said.

What the price will do this winter is anybody’s guess, and there’s a lot of speculation that’s making even the oil dealers nervous.

“I’m scared to death of programs for next year…of what the prices are going to be,” said Bob Clifford, owner of Colby & Gale Oil in Damariscotta. “I’m very nervous about getting locked into the wrong price,” he said, wondering “could the price go down as fast as it went up?”

Dealers buy a kind of insurance to protect themselves from the swings in the commodities market – known as the NYMEX or New York Mercantile Exchange – essentially allowing them to sell back to the market what they bought at the price they paid. But the swings are getting more volatile. They are so unpredictable, in fact, that insurance rates of 6 to 7 cents a gallon last winter are going to be 18 cents or higher this year.

“My guys are looking at 18 cents for insurance,” said Jamie Py, president of the Maine Oil Dealers Association, based in Brunswick. “Insurance numbers that high,” he said, speak to the speculation and volatility in the market.

In a letter to Sen. Olympia Snowe, Py is asking that Congress request an investigation. It reads, in part:

“We are writing today to express our deep concern with the behavior of the petroleum futures on the New York Mercantile Exchange (NYMEX), specifically the heating oil and gasoline futures contracts. Over the past two years we have seen increasing volatility in the daily price changes in these contracts, daily volatility that reaches 8 or even 10 cents per gallon…There have been periods of a few weeks where the commodities exchange sees the trading of the equivalent of an entire year’s consumption of heating oil.”

Py said he wrote the letter to try and get some answers for his dealers.

“It’s hard to say where the market is going to go, but there’s no real good fundamental reason why it’s staying high,” Py said.

Price drivers

That’s not to say supply and demand don’t count. There’s growing demand in China and India and there have been disruptions in supply. And, since Sept. 11, 2001, there has been what oil market watchers call a “terror premium,” on the commodities exchange. Still it doesn’t explain all the volatility.

The most controversial recent hike in the market happened at the end of last month when the investment bank, Goldman Sachs, predicted the price of oil could go as high a $105 a barrel, even without a major supply disruption.

The bank said strong demand coupled with instability in oil producing countries would inflate prices. That prediction of the so-called “super spike,” sent the price of a barrel of oil to $57.70.

Just when it looked like that price was going to correct itself, the market got hit with what Hugh Macnaughton of the Sprague Market Watch called the annual phenomenon of the country’s “real obsession with gasoline inventories going into the driving season.” They were low compared to predicted summertime demand.

Since the same barrel of crude that makes heating oil is also refined into gasoline, diesel fuel, jet fuel and kerosene, the prediction of a low gasoline supply sent the price back up again.

Mike Shea, president of Webber Oil, said he thinks the problem is that gas and heating oil are traded on the commodities market in the first place.

“It’s the only consumer product that is a traded commodity,” he said, versus a commodity that is made into a consumer good.

“If the price of corn or oats goes up, it doesn’t translate into your cornflakes tomorrow morning on your breakfast table,” he said. With heating oil and gasoline, there’s “no buffer” between what the price does in the commodities market and what consumes pay the next day.

He also feels the oil dealers are unfairly blamed for the price hikes. Dealers generally mark up the gallon price by 40 cents, he said, to cover operating costs – including regular delivery and after-hours service – and to make a profit.

“Customers are our most valuable asset,” he said, but, “We get painted as someone who is not on their side,” because of the price hikes.

“We buy oil second to the last to you,” he said, after “a whole big system” including the drillers and refiners and investors in the market. “The only oil person a customer sees is the driver who delivers to your house.”

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